Before the annual budgets are prepared, the budget committee should determine a base from which the budget process will begin. Because the time-consuming and high cost of Zero-base Budgeting, which ask managers to start at zero budget level every year, and justify all the cost as if the activities involved were being initiated for the first time. The budgeting committee could choose the Incremental Budgeting, which is concerned mainly with the increment in operation or expenditures that will happen during the budget period. It takes into account current expenditure plus an estimate of next year’s expenditure to arrive at the new budgets.
The third step is to establish the budgets policy and guideline, and to communicate the details of policy and guideline of budgets to the relevant managers who are responsible for the preparation of the individual budgets. Budgets are set within the framework of long-term plans, and should be compatible with the objectives and strategic plan of the hotel. Every members of the budgeting committee should keep this principle in mind. The top management of Highgrove Manor Hotel must communicate the policy effect of long-term plans to those who are responsible for preparing the current year’s budgets of the hotel, such as marketing manager, Rod Bassett. The budget committee also need work out the guideline for the budget of the hotel. The objectives of the hotel and budget period could be taken into consideration during the preparation of budgets. Managers in key functional areas of the hotel should be kept well informed of the information of the environmental changes, such as a slump in property prices, a fall in the hotel’s market value, reduction of conference trade, competition from Sandhill Lodge Hotel, and great bank pressure, which the responsible managers should respond to. All these guideline should be communicated to the responsible managers. It can ensure that budgets conform to the long-term plans and objectives of Highgrove Manor Hotel. Besides these, the management accountant could produce a budget manual, which outlines the objectives and procedures of the budgeting process. It also provides a recommended format and a timetable for the budgets, which could be very useful reference for the responsible managers. They could know their responsibilities, the order of preparing budgets and the date when they represent the draft budgets to the budget committee.
The forth step is to determine the key or limiting factor and constraints, which prevent the hotel from achieving the objective in the maximum extent. The limiting factor will set limits to growth of level of activities of Highgrove Manor Hotel. It is very important to identify the limiting factor, as the most budgets will be affected by the limiting factor, so other mangers in the functional areas of the hotel can be informed of the restriction early in the budgeting process. Among the constraints are the competition from Sandhill Lodge Hotel, the fall in the hotel’s market value, the reduction of the hotel’s ability to pay interests, and the drop of the conference trade. The budget officer, Jane Black, should take responsibility of identify the limiting factor that restrict the performance of Highgrove Manor Hotel. It is clear that the room occupancy of Highgrove Manor Hotel has decreased since the year of 1997, which could be caused by the competition from Sandhill Lodge Hotel, a fall of the conference trade. The room occupancy could influence the revenue of the hotel and determine the performance of Highgrove Manor Hotel. The volume of customers of the hotel should be the limiting factor of the hotel.
The fifth step is to prepare the budget for the area of the limiting factor of Highgrove Manor Hotel. When the limiting factor of the hotel is identified. The marketing manager of the hotel needs to prepare the budget for the limiting factor----volume of the customers of the hotel. The volume of customers is the main factor, which restricts the revenue of the hotel. For this reason, this budget is most important plan in the annual budgets of Highgrove Manor Hotel. This budget is also the most difficult plan to produce, because the volume of the customers of hotel is influenced by so many factors, such as the behaviour of customers, the state of economy, or the action of competitors, which are not easy to predict. Marketing manager of hotel may make this budget on the basis of the marketing demand forecasting. The volume of the customers could be estimated based on the information from market research and statistical techniques, which incorporate the general information of hotel, market conditions and past figures in the customer volume. Marketing manger of the hotel make this budget to provide the major input for the formulation of the budget for the production function area in the hotel-----accommodation department, restaurant, and clubs. It enables the planning of optimum levels of stocks in the hotel, avoiding under or over stocking of resources.
The sixth step is to prepare the draft budgets for all other areas in the hotel. When the budget for the area of the limiting factor is prepared, the budgets of all other areas should be prepared on the basis of the level of the expected volume of customers during the budgets period. The mangers should prepare those budgets for the areas for which they are responsible in the hotel. According to the top-down approach, managers of each budget area set the budget target by discussing with lower level of management. These managers could use the computer to help them to produce the draft budgets for the area they are responsible for in the hotel, because the draft budget could be refined many times before the final version is produced. On the basis of the expected level of customer volume, managers of accommodation department, restaurant, and clubs will prepare their “production budget ”, and the budgeted level in the “production budget” will then be translated into how much material and labour will be required to meet that particular level. The manager of purchasing department will prepare material purchasing budget, and manager of warehouse will produce stock budget. The manager of human resource department will prepare the labour budget. The manager of distribution department should produce a distribution budget. The manager of administration department will prepare the administration budget, which takes account of all the overheads of the hotel and fixed cost from the administrative point of view. The accounting manager should prepare the cash budget, which translates all the other budgets into cash terms.
The seventh step is the review and coordination of the budgets. After the manger have prepared the budgets for their areas respectively, the budget committee of the hotel has the responsibility of reviewing the various budgets and ensure that they are in harmony with each other and with the long-term plans and objectives of the Highgrove Manor Hotel. If some budget is not compatible with other budget, the steps must be taken to ensure that it will be complementing to other budgets and will be compatible with conditions and plans, which are beyond the individual manger’s knowledge or control. Any changes in the budgets will be made by the managers responsible for the budgets.
The eighth step is to prepare the master budget. When all the budgets are in harmony with each other, they will be summarized into a master budget, which are the budgeted profit and loss account, the budgeted balance sheet, the budgeted cash flow statement. The budget committee should take the reasonability of prepare the master budget on the basis of the information from various individual budgets that have been produced by the responsible managers.
The ninth step is to communicate the budgets to all interested parties. Once the budgets are formally agreed, the budget committee will pass them to the managers, who are responsible for implementing the planned performance in the budgets. The budgets are also compared with the results of the current year. If the results of budgets are considered to be satisfactory, the proposal of budges is the authority for the responsible managers to carry out the plans of each budget in Highgrove Manor Hotel.
The Budgetary Control
The budget process should not stop, when the budgets have been agreed. Budget planning does not ensure he realization of the plans or budgeted targets. It is necessary to have the budgetary control:
Firstly, the specific staff in each area of the hotel should monitor the actual performance of their area of the hotel against the budgets, and they should collect the information of the actual performance of the hotel every day.
The second step is to compare the actual results with the budgets. The responsible managers should make this comparison periodically, perhaps monthly. Through the comparison, difference will be identified between the budgets and actual performance. To be effective, the comparison should be carried out against the flexed budgets, which indicates that the targets in the budgets need to be flexed based on the actual level of activities of the hotel. A report of the results of comparison will be sent to the top management of the hotel.
Third step is that according to the report of actual performance of the hotel, the top management will identify the areas which are meeting the budgeted targets, and which are not proceeding according to the plans in the budgets, and then the top management will investigate reasons for the difference between actual performance and budgets. They can use the variance costing to find out the reasons and who will be responsible for the differences. For instance, purchasing department should be responsible for the material price variance; the human resource department will be responsible for the labour rate variance.
Finally, once the reasons for the differences between actual performance and budgets are identified, the top management need to take corrective action to avoid the similar problems happening again. If the differences are caused by the reasons out of control of management. For example, the environment has changed since the budget is produced or the targets of the budgets are not realistic. In these cases, the budget committee should revise the budgets to be workable or meet the requirement of the environmental changes. The revised budgets will be valid for the rest of budget period.
Summary
In summary, the budget process is a part of the large system, which also involves setting the objectives and making strategic and long-term plan of the hotel. The budget is indeed beneficial to Highgrove Manor Hotel. It enables the planning and control in the hotel, and plays the role of motivation and coordination in the hotel. To prepare the budgets, the top management should establish the budget committee, whose member should be familiar with the objectives, strategic and long-term plans of Highgrove Manor Hotel. The top management should communicate the guideline of the budgets to the members of the budget committee, before the annual budgeting is begun. After that, the limiting factor will be identified in the hotel, and the budget will be prepared for it. Except preparing the budget for the limiting factor in the hotel, the budget committee also should produce budgets for all other area. After the review and coordination of budgets, the management accountant of the hotel should prepare the master budget. The budget committee will finally communicate the budgets to all interested parties in Highgrove Manor Hotel.
After the budgets are prepared, the budgetary control should be exercised in the hotel. The budgetary control is to monitor and collect the information of the actual performance of the hotel, and then compare this information with budgets to identify the variances. The top management of the hotel will find out the reasons for the variances and take the corrective action in the hotel. The budgetary control can ensure the realization of plans in the budgets in Highgrove Manor Hotel.
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